Pizza Hut 2005 Annual Report Download - page 65

2004฀or฀2003฀for฀those฀foreign฀currency฀forward฀contracts฀
designated฀as฀cash฀flow฀hedges.
Equity฀ Derivative฀ Instruments฀ On฀ December฀3,฀ 2004,฀
we฀entered฀into฀an฀accelerated฀share฀repurchase฀program฀
(the฀“Program”).฀In฀ connection฀with฀ the฀Program,฀a฀third-
party฀investment฀bank฀borrowed฀approximately฀5.4฀million฀
shares฀of฀our฀Common฀Stock฀from฀shareholders.฀We฀then฀
repurchased฀ those฀ shares฀ at฀ their฀ then฀ market฀ value฀ of฀
$46.58฀ per฀ share฀ from฀ the฀ investment฀ bank฀ for฀ approxi-
mately฀$250฀million.฀The฀repurchase฀was฀made฀pursuant฀to฀
the฀share฀repurchase฀program฀authorized฀by฀our฀Board฀of฀
Directors฀in฀May฀2004.
Simultaneously,฀ we฀ entered฀ into฀ a฀ forward฀ contract฀
with฀the฀investment฀bank฀that฀was฀indexed฀to฀the฀number฀of฀
shares฀repurchased.฀Under฀the฀terms฀of฀the฀forward฀contract,฀
we฀were฀required฀to฀pay฀or฀entitled฀to฀receive฀a฀price฀adjust-
ment฀based฀on฀the฀difference฀between฀the฀weighted฀average฀
price฀ of฀ our฀ Common฀ Stock฀ during฀ the฀ duration฀ of฀ the฀
Program฀and฀the฀initial฀purchase฀price฀of฀$46.58฀per฀share.฀
At฀our฀election,฀any฀payments฀we฀were฀obligated฀to฀make฀
were฀either฀to฀be฀in฀cash฀or฀in฀shares฀of฀our฀Common฀Stock฀
(not฀to฀exceed฀15฀million฀shares฀as฀specified฀in฀the฀forward฀
contract).฀The฀Program฀was฀completed฀during฀the฀quarter฀
ended฀March฀19,฀2005฀and฀we฀made฀ a฀ cash฀payment฀of฀
approximately฀$3฀million฀to฀the฀investment฀bank฀to฀settle฀
the฀forward฀contract฀in฀full.฀This฀payment฀representing฀the฀
change฀in฀fair฀value฀of฀the฀forward฀contract฀was฀recognized฀
in฀accordance฀with฀EITF฀00-19,฀“Accounting฀for฀Derivative฀
Financial฀Instruments฀Indexed฀ to,฀ and฀ Potentially฀ Settled฀
In,฀a฀Company’s฀Own฀Stock”฀as฀an฀adjustment฀to฀Common฀
Stock฀and฀is฀included฀in฀share฀repurchases฀in฀Note฀18.
Commodity฀Derivative฀Instruments฀ We฀also฀utilize,฀on฀a฀
limited฀ basis,฀ commodity฀ futures฀ and฀ options฀ contracts฀
to฀mitigate฀ our฀ exposure฀ to฀ commodity฀price฀ fluctuations฀
over฀ the฀ next฀ twelve฀ months.฀ Those฀ contracts฀ have฀ not฀
been฀designated฀as฀hedges฀under฀SFAS฀133.฀Commodity฀
future฀and฀options฀contracts฀did฀not฀significantly฀impact฀the฀
Consolidated฀Financial฀Statements฀in฀2005,฀2004฀or฀2003.
Deferred฀Amounts฀in฀Accumulated฀Other฀Comprehensive฀
Income฀(Loss)฀ As฀of฀December฀31,฀2005,฀we฀had฀a฀net฀
deferred฀loss฀associated฀with฀cash฀flow฀hedges฀of฀approxi-
mately฀$1฀million,฀net฀of฀tax.฀The฀loss,฀which฀primarily฀arose฀
from฀the฀settlement฀of฀treasury฀locks฀entered฀into฀prior฀to฀
the฀issuance฀of฀certain฀amounts฀of฀our฀fixed-rate฀debt,฀will฀
be฀reclassified฀into฀earnings฀from฀January฀1,฀2006฀through฀
2012฀as฀an฀increase฀to฀interest฀expense฀on฀this฀debt.
Credit฀ Risks฀ Credit฀ risk฀ from฀ interest฀ rate฀ swaps฀ and฀
foreign฀exchange฀contracts฀is฀dependent฀both฀on฀movement฀
in฀ interest฀ and฀ currency฀ rates฀ and฀ the฀ possibility฀of฀non-
payment฀by฀counterparties.฀We฀mitigate฀credit฀risk฀by฀entering฀
into฀these฀agreements฀with฀high-quality฀counterparties,฀and฀
settle฀swap฀and฀forward฀rate฀payments฀on฀a฀net฀basis.
Accounts฀receivable฀consists฀primarily฀of฀amounts฀due฀
from฀ franchisees฀ and฀licensees฀ for฀ initial฀and฀ continuing฀
fees.฀In฀addition,฀we฀have฀notes฀and฀lease฀receivables฀from฀
certain฀of฀our฀franchisees.฀The฀financial฀condition฀of฀these฀
franchisees฀ and฀licensees฀is฀ largely฀ dependent฀upon฀the฀
underlying฀business฀trends฀of฀our฀Concepts.฀This฀concentra-
tion฀of฀credit฀risk฀is฀mitigated,฀in฀part,฀by฀the฀large฀number฀
of฀franchisees฀and฀licensees฀of฀each฀Concept฀and฀the฀short-
term฀nature฀of฀the฀franchise฀and฀license฀fee฀receivables.
Fair฀ Value฀ At฀ December฀31,฀ 2005฀ and฀ December฀25,฀
2004,฀the฀fair฀values฀of฀cash฀and฀cash฀equivalents,฀short-
term฀investments,฀accounts฀receivable฀and฀accounts฀payable฀
approximated฀the฀carrying฀values฀because฀of฀the฀short-term฀
nature฀of฀these฀instruments.฀The฀fair฀value฀of฀notes฀receiv-
able฀approximates฀the฀carrying฀value฀after฀consideration฀of฀
recorded฀allowances.
The฀carrying฀amounts฀and฀fair฀values฀of฀our฀other฀financial฀
instruments฀subject฀to฀fair฀value฀disclosures฀are฀as฀follows:
฀2005฀ 2004
฀ Carrying฀฀ Fair฀ Carrying฀฀ Fair฀
฀ Amount฀ Value฀ Amount฀ Value
Debt฀
Short-term฀borrowings฀and฀฀
฀ long-term฀debt,฀excluding฀฀
฀ capital฀leases฀and฀the฀฀
฀ derivative฀instrument฀฀
฀ adjustments฀ $฀1,752฀ $฀1,931฀ $฀1,593฀ $฀1,900
Debt-related฀derivative฀฀
฀ instruments:
฀ ฀ Open฀contracts฀in฀a฀฀
฀ ฀ net฀asset฀(liability)฀฀
฀ ฀ position฀ ฀ (5)฀ ฀ (5)฀ ฀ 38฀ ฀ 38
Foreign฀currency-related฀฀
฀ derivative฀instruments:
฀ ฀ Open฀contracts฀in฀a฀฀
฀ ฀ net฀asset฀(liability)฀฀
฀ ฀ position฀ ฀ —฀ ฀ —฀ ฀ (2)฀ ฀ (2)
Lease฀guarantees฀ ฀ 16฀ ฀ 27฀ ฀ 13฀ ฀ 29
Guarantees฀supporting฀฀
฀ financial฀arrangements฀฀
฀ of฀certain฀franchisees,฀฀
฀ unconsolidated฀affiliates฀฀
฀ and฀other฀third฀parties฀ ฀ 7฀ ฀ 7฀ ฀ 7฀ ฀ 8
Letters฀of฀credit฀ ฀ —฀ ฀ 1฀ ฀ —฀ ฀ 2
We฀estimated฀the฀fair฀value฀of฀debt,฀debt-related฀derivative฀
instruments,฀foreign฀currency-related฀derivative฀instruments,฀
guarantees฀and฀letters฀of฀credit฀using฀market฀quotes฀and฀
calculations฀based฀on฀market฀rates.
14.฀PENSION฀AND฀฀
POSTRETIREMENT฀MEDICAL฀BENEFITS
Pension฀ Benefits฀ We฀ sponsor฀ noncontributory฀ defined฀
benefit฀ pension฀ plans฀ covering฀ substantially฀ all฀ full-time฀
U.S.฀salaried฀employees,฀certain฀U.S.฀hourly฀employees฀and฀
certain฀international฀employees.฀The฀most฀significant฀of฀these฀
plans,฀the฀YUM฀Retirement฀Plan฀(the฀“Plan”),฀is฀funded฀while฀
benefits฀from฀the฀other฀plans฀are฀paid฀by฀the฀Company฀as฀
incurred.฀During฀2001,฀the฀plans฀covering฀our฀U.S.฀salaried฀
Yum!฀Brands,฀Inc.฀ ฀ ฀ |฀ ฀ ฀ 69.